Crop Subsidies, Price Control and Crop Insurance

The question of whether or not to implement governmental subsidies of agriculture has long been inciting vehement arguments from both sides. This implies that the solution to this issue should be case-specific. But in order to fully understand the nature of this issue, we need to look at the goals of crop subsides:

increase incentive for agricultural production

control food prices

increase access to food/maintain food security

stabilize/protect domestic agricultural industry

insure farmers’ livelihood

At first sight, goal 1 listed above seems reasonable and well-intentioned. However, if the production of a certain crop can only be sustained by a continual influx of governmental subsidies, it is vastly inefficient and perhaps shouldn't be grown at the location. If we establish a quick and efficient regional and international trade system, goal 1 should be obsolete.

Goal 2 and 3 are both seemingly well-intentioned, as securing food for the public and jobs for farmers are part of the foundation for a functional economy. But they are nonetheless very controversial. Ideally, we need to maintain food security, so a stabilization of food prices aimed towards increasing access to food for the poor (2.1) seems necessary. But heavily subsidizing crops and controlling food prices in order to protect domestic agriculture (2.2) have faced mixed reviews from economists.

In Asia, it appears that government interventions of food price stabilization policies worked, largely due to an expanding role for an efficient private marketing sector and resulted in economic growth (Timmer, p. 6). On the other hand, in Southeast Asia, reforms consisting of a deregulation in food prices and removal of subsidies in agricultural inputs leads to significant agricultural growth (Mya). The unfavorability of old government subsidies and regulation of food prices in Southeast Asia seems to be a result of a “bias against agriculture” in those policies. Hence, the liberalization of prices and trade that Mya championed only make sense when we are liberalizing them from bad governmental policies.

Domestic crop subsidies within developed countries has faced universal criticism from economists. Much of the subsidies used in developed countries are economically inefficient. A study from Key, Roberts and O'Donogue (2006) shows that an increase in U.S. federal crop insurance subsidies between 1992 and 1997 did not change the risks that small farm holders faces nearly as much as it did for large and median size farmers. Therefore, the developed nation's approach of crop subsidies isn't efficient in achieving the goal 3 above in insuring the farmer's livelihood, as small farm holders are the ones who suffers the most risks. As a result, Key, Roberts and O'Donogue suggest that we should let farmers find other risk-coping mechanisms. In addition, the protectionism embedded in the U.S. federal corn crop subsidies, heavily lobbied by agricultural groups, leads to a limitation of imports of Brazilian sugar cane-ethanol that can be much more efficiently used for biofuels than the subsidized American corn (Collier, 2008). More details about the inefficiency of subsidized biofuel production in developed nations can be found on the Biofuels page. It is easy to see that most crop subsidies in the developed nations are unnecessary and inefficient, especially in the case of biofuels.

However, completely eliminating subsidies isn't the answer either. For instance, some kind of emergency response to disaster is needed in order to keep farmers' livelihood and keep the food prices reasonable. Von Braun et al. (2008) of the International Food Policy Research Institute suggest that “expand[ing] emergency responses and humanitarian assistance” and “invest[ing] in social protection” are instrumental to global food security. They also suggests measures including "freezing biofuel production at current levels, reducing it, or imposing a moratorium for biofuels based on grains and oil seeds until prices come down to reasonable levels," which my previous findings also supports.

In addition, von Braun et al. (2008) suggest that instead of relying on governmental subsidies, we need to increase long-term investment and innovative crop insurance mechanisms for sustained agricultural growth. But as McNeely and Norgaad (1992) suggests, unregulated foreign investment in the agriculture of developing nations can damage the biodiversity in those countries and thus hinder long-term agricultural growth.

In conclusion, my research lead me to the following conclusions, which shall serve as the premises of my proposed solution:

For Least Developed Countries (LDCs):

Eliminate the “bias against agriculture” in economic policies

Deregulate inputs of agriculture (fertilizer, machinery, pesticides)

Allow price stabilization policies, but not so much as to curb profits of farmers/producers

Encourage more investments in agriculture, and set up innovative crop insurance mechanisms

For Most Developed Countries (MDCs):

Greatly reduce/eliminate any subsidies aimed for increased production and domestic agricultural protectionism, especially for biofuel production

Regulate investments in foreign agriculture of LDCs so as to ensure fairness of those partnership and sustainability of affected farm practices

This solution will affect any nation that has a significant amount of arable lands, where proposed changes in governmental policies of crop subsidies and price controls can have an impact on the agricultural economy. The LDCs (developing nation) and MDCs (developed nation) are defined as in the Article 1 of the Nation Protocol. The steps of implementation are as follows:

Firstly, reducing the inefficient subsidies in MDCs is a priority. This should be done through a international organization that has leverage on member nations, such as the UN and WTO. An international agreement/protocol (with the Nation Protocol as a model) should be signed by most MDCs, especially major agricultural exporters, so as to minimize harmful impact of crop subsidies in MDCs on the agricultural growth of LDCs. To reduce shock and to allow the farmers in MDCs to adapt, the removal of the subsidies should be done over a ten year period, as suggested in the Biofuels page.

Secondly, establish a international monitoring agency that examines foreign investments of agriculture in LDCs to make sure that the farmers there are not at any disadvantage. This agency can be a department in the UN.

Thirdly, draft a protocol to be signed by LDCs with significant agriculture industry where they agrees to follow the policy guidelines set forth above. In addition, we need to send economic policy advisors to LDCs to guide them in drafting relevant and effective policies on crop subsidies and price controls. These advisors can be from WTO or a volunteer international organization.

Since this proposal largely involves convincing nations to follow provided guidelines for their domestic policies of crop subsidies and price controls, the funding required should consists of advertising campaigns in reluctant developed nations. Campaigning for grass-root support for these new policies is also very necessary to convince those nations. This should be done in junction with the proposal for an International Trade Program.

The WTO can 1) initiate drafting of a protocol/agreement on what each member nation's crop subsidies policy should be and regulate international investments in LDC's agriculture; 2) set up some kind of advisory board to advise the nations regarding their crop subsides policies.

The UN can 1) help establish the international agreement on crop subsidies policy; 2) establish a monitoring agency for ensuring fairness in international investments in LDC's agriculture; 3) enforce the agreement through conditional aid.

In addition, the IFPRI can help research the optimal economic policies of crop subsides and price control specific to every country and aid the organization responsible for sending advisors to LDCs.

Due to the urgency of reducing and eliminating harmful crop subsidies in MDCs, the international protocol/agreement pertaining to it should be drafted and signed as soon as possible. Hence, an international summit regarding global poverty should be called. This probably takes about an year or two for preparations, which includes advertising campaigns in MDCs. As a result, the protocol should be drafted and signed by 2012-2013, with the goal to remove most of the inefficient subsidies by 2020. The monitoring agency should also be established by around 2012.

Meanwhile, economic advisors can work with LDCs to shape their domestic agricultural policies on subsidies and price controls. The international protocol signed by LDCs should expedite the process of getting LDCs to agree to follow policy guidelines set forth by the advisors sent to them. Hence, this should be completed any time between 2015 and 2020.